Tuesday, November 20, 2012

Bridgepoint: An Education In Cash Management

The for-profit education sector has taken a huge beating over the last few quarters. But mitigating this opportunity is the fact that many of the business models of these companies will have to change significantly in order to cope with new rules designed to ensure they do not abuse federal loan programs. But there is one company among them in particular that trades at an exceptionally low level despite the uncertain future: Bridgepoint Education (BPI).

Unlike other stocks in this space, Bridgepoint trades at a discount to its net cash and investments! Despite cash and investments of $470 million against no debt, Bridgepoint's market cap is a paltry $464 million.

Seeing those numbers above, you might think Bridgepoint was losing cash hand over fist. It's not. The company earned over $30 million last quarter, and the mean analyst estimate calls for earnings next year of over $75 million.

So what gives? What's worrying the market is that the company is in the midst of applying for accreditation from the Western Association of Schools and Colleges (WASC). The problem is that WASC rejected the company's application the first time around. Worse, the rejection appears to have prompted the company's current accreditor (the Higher Learning Commission, or HLC) to re-evaluate its standing.

The company is thus surrounded by an enormous amount of uncertainty, which the market rarely likes and often punishes. The pressure is on for the company's WASC application. If that goes through successfully (decision: approximately June of 2013), the upside for shareholders appears massive: the company would be worth substantially more than just its cash holdings.

If it doesn't go through, the company will likely have to make further changes in order to stay accredited with HLC, but little information is available on just how much this would cost (transferring personnel in order to have more of a "regional presence" in HLC's area will likely be one requirement, for example).

In the worst case scenario, one might think that the company's cash buffer provides a whole lot of downside protection, but that's not necessarily the case here. There are claims on that cash; those claims just don't happen to be debt. The company has deferred revenue of $170 million, suggesting that if it is no longer accredited it would either have to pay this money back or provide services that would cost a good chunk of that.

These obligations keep me on the sidelines. But for someone who understands the accreditation process better, this could be a stock with strong upside compared to a limited downside. If the odds of accreditation failure with WASC are low (something that is very difficult for me to ascertain), this stock is severely undervalued.

2 comments:

Anonymous
said...

Great post. Nate Tobik had a similar post on the "for profits" about a year ago.

Unfortunately for me, I cannot get over the negative feelings I have for this industry to even analyze it. I would have no problem investing in a tobacco company....yeah they kill people. But the consumer knows the deal when they buy a pack.

The for profit... they have been selling a lie (mostly) to their consumers....saddling them down with debt that is not forgiveable in bankruptcy. Anyway, for the contratrian, now is probably the time to buy.

These are people (generally) willing to work hard to get ahead. All their work leads to nothing.

Perhaps in Canada they don't have "for profit" schools?

Here in the states these things are awful jokes. Very few employers will hire from these places as it is open enrollment. Further, the grading standards are VERY lax. if you can string together some sentences, you are passing!

The diplomas is frequently worth NOTHING. Sometimes the skools train for fields that their graduates can't get licensed in (esp. medical field). So what good is the education?

Most of these places are simply transferring wealth from the taxpayer to the corporation with the student crushed in the middle.